Written by: David B. Honig

In United States ex rel. Schneider v. JPMorgan Chase Bank, Nat’l Ass’n.[1], the D.C. Circuit re-affirms its position that contingent penalties are not obligations under the False Claims Act (“FCA”).

BACKGROUND

In the initial suit[2], Relator brought a qui tam action under the FCA against mortgage loan servicer JPMorgan Chase (“Chase”), alleging, in part, that Chase falsely claimed compliance with a settlement (“Settlement”) that Chase (and certain other large banks) reached with the United States and various state governments.[3] Under the terms of the Settlement, Chase was obligated to comply with certain servicing standards, and a monitor was appointed to ensure that Chase complied with such standards. The Relator argued that the monitor’s determination that Chase had complied with the servicing standards was incorrect because Chase falsely certified such compliance. As a result, the Relator claimed that damages were due to the United States and the applicable state governments based on potential penalties for lender violations as set forth in the Settlement. The United States District Court for the District of Columbia granted Chase’s motion to dismiss as to the Settlement’s claims on the basis that Relator could not bring these claims without first exhausting the Settlement’s dispute resolution procedures. The D.C. Circuit affirmed the district court’s decision.[4]

ANALYSIS

Although the circuit court rejected the district court’s reasoning as to the Settlement claims, it affirmed the district court’s decision on the basis that “potential” exposure to penalties for alleged noncompliance with the Settlement’s servicing standards is not an obligation within the meaning of the FCA.

As noted by the D.C. Circuit, the FCA requires a fraud claim that is “material to an obligation to pay or transmit money or property to the Government.” According to the court, such an obligation arises when there is “an established duty, whether or not fixed, arising from an express or implied contractual … or similar relationship.” However, in this instance, the Settlement contains a series of steps before Chase could be assessed any penalties, including a citation from the monitor, failure to cure, failure of informal dispute resolution, the filing of a suit in the district court and the district court judge exercising his or her enforcement discretion to award monetary penalties.[5]

In light of the foregoing, the D.C. Circuit firmly held, citing its 2008 decision in Hoyte v. American National Red Cross[6] and several other sister circuits, that “contingent exposure to penalties which may or may not ultimately materialize does not qualify as an ‘obligation’ under the [FCA].”

PRACTICAL TAKEAWAYS

The D.C. Circuit’s decision here is, yet, another example of federal circuit courts drawing the line at “potential” penalties being considered obligations under the FCA.

Therefore, if a provider can show that an alleged monetary penalty is merely a contingent possibility and not an established duty to the government, such potential penalty may not qualify as an obligation under the FCA and, thus, may not form the basis of a relator’s qui tam action.

Relator also alleged that Chase falsely claimed compliance with the Home Affordable Modification Program (“HAMP”). The district court dismissed this claims without prejudice finding that Relator did not sufficiently allege material noncompliance with HAMP in the complaint.↵

The circuit court disagreed with the district court’s exhaustion conclusion but affirmed its dismissal of the Settlement claims on a related basis. The circuit court did, however, agree with the district court’s analysis of the HAMP claim.↵

Under the terms of the Settlement, the “relief available in such an action could be either non-monetary equitable relief or other nonmonetary corrective action or civil penalties.”↵

Written by: David B. Honig

The Tenth Circuit’s recent decision in United States ex rel. Little v. Triumph Gear Sys., Inc. refines its definition of “intervene” in light of the Supreme Court’s decision in United States ex rel. Eisenstein v. City of New York. In doing so, the Tenth Circuit also seems to indicate that the original filing by the initial relator equates to a public disclosure, thus precluding subsequent relators who do not meet the requirements of 31 U.S.C. 3730(e)(4)(A).

Background

The defendant was a government contractor that manufactured aerospace gear systems.[1] The initial complaint, filed by Joe Blyn and three “John Does,” claimed the defendant violated the False Claims Act.[2] Before the initial complaint could be served plaintiff’s counsel of record, Donald Little filed an amended complaint that named himself and a third person, Kurosh Motaghed, as the sole relators.[3] All references to Mr. Blyn and the John Does were inexplicably removed from the complaint.[4] The new relators amended the complaint twice more, and the defendant filed a motion to dismiss on multiple grounds, including that the district court lacked jurisdiction over the amended complaint under the FCA’s first-to-file rule.[5]

The district court denied the defendant’s motion to dismiss, citing the Tenth Circuit’s decision in Precision Company v. Koch Industries,Inc.[6] The district court determined that Little and Motaghed were not considered “interveners” for the purpose of § 3730(b)(5). Because they intervened through Fed. R. Civ. P. 15, and not Fed. R. Civ. P. 24[7] on appeal, the Tenth Circuit distinguished this case from Precision and reversed the district court’s decision, stating that the first-to-file rule bars the new relators because they were not added by an existing plaintiff.[8] Rather, Little and Motaghed added themselves and completely removed the initial relator.[9] The Tenth Circuit’s decision not only clarifies the definition of “intervene” and an intervener’s ability to amend the initial complaint but raises the public disclosure bar that a plaintiff must clear.

Analysis

Neither the Tenth Circuit, nor the district court, were able to ascertain why Mr. Blyn vanished from the action entirely. In fact, the Tenth Circuit noted that Little, “simply substituted his name for Blyn’s without regard for the resulting incongruities.”[10] In respect to the second relator, “none of the amended complaint’s substantive allegations pertain to Motaghed, despite his status as a putative relator.”[11] This wholesale removal of the initial relator required the court to determine how the two new relators could be considered to have “intervened” as contemplated in § 3703(b)(5) of the FCA.

The Tenth Circuit did not have to delineate between addition and intervention Rules 15 and 24.[12] Little and Motaghed entered the action through no procedural method the court could identify.[13] The court indicated that, because Fed. R. Civ. P. 15(a)(1) only allows amendments by parties and not non-parties, Little and Motaghed, as non-parties, had no right to amend the complaint.[14]

Practical Takeaways

The Tenth Circuit’s justification for avoiding a debate between Rule 15 addition and Rule 24 intervention seems to indicate that relators, who attempt to intervene in this rather unique situation, are not an original source of the allegations and therefore cannot survive the public disclosure bar. Additionally, the Tenth Circuit has indicated that, in light of the Supreme Court’s decision in Eisenstein, the Tenth Circuit’s previous decision in Precision may no longer be good law.

Written by: Drew B. Howk

Recently, the Department of Justice (“DOJ”) announced it had entered into a $42 million settlement (“Settlement”)[1] with the owners of a California acute care hospital (“Parent Company”) to resolve allegations that the Parent Company had violated the False Claims Act by submitting false claims to Medicare and MediCal (California Medicaid) programs. The Parent Company is a fully integrated health care company comprising the Hospital at issue, a managed care organization, two physician practice associations and 50 percent ownership in a health plan specifically for MediCal. Nearly $32 million will be paid to the United States to settle allegations of false claims against Medicare and $10 million will be paid to the state of California to settle the allegations that carried potential damages of over $400 million.

Background

A former manager of the Hospital filed the qui tam (i.e., whistleblower) action under seal in June 2013. The Complaint alleged improper relationships between the Parent Company and physicians and that the Parent Company compensated the physicians in excess of fair market value and took into account the volume or value of referrals to the Hospital by the physicians. In addition, the Complaint alleged that the Hospital violated the Civil Monetary Penalties Law (“CMP”) by inducing federal health care program beneficiaries to choose certain providers. Although both governments declined intervention in the case, the relator moved forward. In its Settlement announcement, the DOJ stated, “This settlement is a warning to health care companies that think they can boost their profits by entering into improper financial arrangements with referring physicians.”

Details Alleged in the Complaint

The relator alleged violations of both the Stark Law and the Anti-Kickback Statute for actions beginning in 2006. The relator alleged the Parent Company violated both statutes by entering into arrangements with physicians that accounted for the volume of the physicians’ patient referrals to the Hospital and intentionally induced referrals. Allegedly problematic arrangements between the hospital and various members of its medical staff included:

Sublease Agreements: The Hospital entered into sublease arrangements with various physicians in order to host one-hour monthly meetings with federal health care program beneficiaries in the physicians’ offices. The rental value for these arrangements exceeded fair market value and accounted for the volume or value of referrals from the physicians. Additionally, the rent was paid on a monthly basis regardless of whether or not the Hospital conducted any meetings in the physicians’ offices.

Shared Marketing Agreements: The Hospital entered into Shared Marketing Agreements with physicians in order to increase the physicians’ patient base and revenues. These initiatives were paid for by the Hospital matching the costs paid for by the physicians. The marketing services provided under these agreements included the advertisement of free transportation available to potential patients.

Vendor Marketing Agreements: The Vendor Marketing Agreements were similar to the Shared Marketing Agreements but without any cost-sharing by the physicians.

Medical Directorship Agreements: The Medical Director Agreements were entered into based upon a target number of referrals/admissions to be made to the Hospital by the physicians. The relator purported to hear the Hospital’s Vice President of Business Development tell a physician that he would receive a Medical Director appointment only if the physician referred or admitted 15-20 patients each month.

The relator claimed that the Parent Company paid remuneration directly to MediCal-enrolled expectant mothers as an inducement to receive maternity services from the Hospital but only if she chose to deliver her baby at the Hospital.

Alleged Evidence of Improper Intent

The relator alleged that the Hospital tracked referrals from physicians and threatened to cancel (or does cancel) arrangements if referral targets went unmet. The Hospital’s marketing team also allegedly conducted weekly discussions of physician referrals including physicians failing to meet referral targets.

The relator claimed personal knowledge of key conversations. These included conversations on providing physicians with compensation in exchange for a guaranteed number of referrals and/or inpatient admissions per month. While many of these discussions were verbal, the Complaint provided evidence of written logs from physician integration representatives documenting similar communications with referring physicians. These written communications summarized conversations with physicians regarding compensation in exchange for patient referrals. In some instances, physicians were told they would receive sublease and/or marketing arrangements if they increased the number of patients they referred to the Hospital.

The Hospital allegedly tracked referrals from physicians and calculated an estimated return on investment for the compensation that was paid to the physicians in exchange for the promise of patient referrals. The Hospital’s staff would then categorize referring physicians into separate tiers based upon the actual and goal volumes of patient referrals and the corresponding return on investment.

Practical Takeaways

As a part of the Settlement, the Hospital denied most of the allegations and all liability. However, providers can learn from the behavior that led to the qui tam action in order to limit potential liability for similar types of arrangements and programs.

While some of the alleged conduct of the Hospital may show evidence of an improper intent on behalf of the parties, not all of the agreements described in the Complaint are per se improper. As such, it is imperative for health care organizations to ensure that they are entering into arrangements for proper purposes (such as community need/benefit, satisfaction of regulatory requirements, population health management, compliance with bundled payment programs, etc.) and that no purpose of any proposed arrangement is to induce or reward referrals from the referring entity.

Health care providers should consult with legal counsel regarding the safeguards that should be in place prior to implementing any protocols to monitor referrals. In addition, providers should be careful regarding calculating things like the return on investment or “contribution margin” associated with referrals by physicians.

When engaging in new physician arrangements, particularly those that are intended to market hospital and physician services and/or provide community outreach to federal health care program beneficiaries, health care organizations should consult with legal counsel in order to ensure that the proposed arrangement is appropriate and legally compliant.

Health care organizations that believe they may have identified arrangements that may be potentially problematic should consult legal counsel as soon as possible in order to review the arrangements and begin any necessary remedial steps.

If you have any questions or would like more information about this topic, please contact:

Written by: Drew B. Howk

The public disclosure bar remains one of the most important tools for disposing of False Claims Act (“FCA”) claims. The Seventh Circuit’s recent decision in United States ex rel. Bellevue v. United Health Services of Hartgrove, Inc. clarified the effect of the 2010 amendments to the public disclosure bar and affirmed the dismissal of whistleblower allegations built upon inferences and publically available information.

Background

The defendant was a psychiatric hospital focused on caring for children and teens. Authorized by Illinois to maintain 150 beds, the Hospital would occasionally place patients on one or two rollout beds in a group room to care for children until a traditional bed became available. A former nursing counselor alleged this practice continued from August 2005 through the present and that it violated the FCA because the Hospital exceeded its 150-bed capacity and thereby either explicitly or implicitly certified its compliance with all federal and state laws. Both the federal and state governments declined intervention.

The district court granted the Hospital’s motion to dismiss for failure to state a claim of fraud with particularity as required by Federal Rules of Civil Procedure 12(b)(6) and 9(b). The Hospital successfully argued that Illinois and CMS each issued an audit letter in 2009 notifying the Hospital that its patient count exceeded the permitted number under its license. The district court ruled that the public disclosure bar prevented any claims prior to the 2009 letters but not claims through the present. Despite this, the court went on to rule that the allegations failed on their merits and it dismissed the action. On appeal, the Seventh Circuit revisited the public disclosure analysis, affirming the district court’s ruling for pre-2009 claims but also expanding it to bar all of the whistleblower’s claims.

Analysis

The Seventh Circuit carefully parsed the 2010 amendments’ substantive changes to the FCA’s public disclosure bar, which removed the jurisdictional bar language. This required the court to treat the public disclosure bar as a jurisdictional challenge for the pre-amendment claims but not the post-amendment claims. The 2010 amendments also clarified what constitutes a public disclosure. The court considered this clarification nonsubstantive and therefore applied it retroactively to all of the whistleblower’s claims. Applying these analyses, the Seventh Circuit walked step by step through the three-step framework of the public disclosure bar, concluding that all of the whistleblower’s claims failed to clear it.

The claims were publicly disclosed. The Seventh Circuit concluded that the audit letters publicly disclosed the critical elements of the alleged fraud: more patients than beds. The inference the whistleblower claimed was unique—the knowing misrepresentation—did not save the claims. The court reiterated that inferences and logical consequences of the disclosed information are sufficient to trigger the public disclosure bar.

The claims were substantially similar to the disclosed allegations. The Seventh Circuit concluded that the disclosed audits were substantially similar to the alleged fraud. Even though the whistleblower alleged continuing fraud past the date of the audit letters, the court made clear that such “unimpressive” differences do not save claims related to the same entity and regarding the same conduct.

The whistleblower was not an original source. Finally, the Seventh Circuit concluded that the whistleblower was not an original source of the allegations and therefore could not survive the public disclosure bar. The whistleblower’s claims were built upon inferences—not direct knowledge of the Hospital’s billing practices. Inferences are not “independent of [and cannot] materially add to the publicly disclosed allegations or transactions.”

The Seventh Circuit affirmed dismissal with prejudice, expanding the district court’s public disclosure bar analysis.

Practical Takeaways

Health care providers facing whistleblower actions have two exit ramps in litigation: a motion to dismiss and a motion for summary judgment. The first of these must be quickly compiled and crafted to leverage the unique contours of FCA litigation. Here, the Hospital’s invocation of the public disclosure bar prevented long and drawn out discovery and motion practice and quickly disposed of meritless allegations. Similarly situated providers should confer with counsel on how to implement a defense strategy that maximizes their ability to challenge such claims early in litigation.

If you have any questions or would like additional information about this topic, please contact:

Written by: Adele Merenstein

On March 21, 2017, a federal judge agreed with the Sauk-Suiattle Indian tribe (the “Sauk-Suiattle” or the “Tribe”) that it could not be sued under the federal False Claims Act (“FCA”) due to the tribe’s immunity from suit as a sovereign nation. The FCA prohibits any person from knowingly presenting or causing to be presented to the United States government a false or fraudulent claim for payment or approval and is a powerful tool in the government’s arsenal to fight fraud and abuse, particularly in the health care arena.[1] The U.S. District Court for the Western District of Washington State (the “Court”) did, however, permit individuals, including the director of a health clinic and the clinic itself, to be sued for allegedly submitting false claims for payment to the federal government and the state of Washington. This case is an important reminder to tribes and their attorneys, especially those involved in health care, to consider whether their tribes’ leaders, health care providers and clinics are sufficiently protected from these increasingly prevalent lawsuits. Tribes and their counsel should consider how best to structure tribal businesses and protect individual employees and agents in light of this and other relevant cases.

Summary of Sauk-Suiattle Order

The Court granted a motion to dismiss a qui tam (i.e., whistleblower) FCA case against the Sauk-Suiattle holding that the Tribe was immune from suit based on tribal sovereign immunity. The Court denied the motion with respect to a co-defendant health clinic and individual co-defendant owners/director[2] of the health clinic, ruling that the sovereign immunity defense did not apply to the clinic or the individuals. The case was dropped with respect to the Sauk-Suiattle, but it will proceed against the health clinic and its owners and director.

The Case Details

Facts and Claim. On January 12, 2016, Raju Dahlstrom filed a complaint under seal against the Sauk-Suiattle, a federally recognized Indian tribe located in Washington State; Community Natural Medicine, PLLC, a tribe-affiliated health clinic (“CNM”); and individuals Christine Morlock, Robert Morlack and Ronda Metcalf (collectively, the “Defendants”) under the FCA[3] and the Washington State Medical Fraud and False Claims Act.[4]

Dahlstrom was a Sauk-Suiattle employee hired in 2010 as a case manager for CNM. He was later promoted to director. He was terminated from employment on December 8, 2015. Dahlstrom alleged that the Defendants knowingly presented or caused to be presented false or fraudulent claims to the U.S. and to the state of Washington by (1) approving payments of cosmetic dentistry for two individuals; (2) allowing an individual to use vaccines specifically donated to the Sauk-Suiattle for that individual’s own private business; (3) fraudulently certifying compliance with the Indian Health Service Loan Repayment Program; (4) using government funds to secretly purchase land originally intended for residential care for children and, after acquiring that land, dropping the programs for children; and (5) fraudulently using government resources designated for health care facility costs.

On September 16, 2016, the U.S. and Washington State notified the Court of their decision not to pursue the case against the Sauk-Suiattle, and the Court ordered Dahlstrom to proceed against the Sauk-Suiattle on his own. On January 12, 2017, the Defendants filed a motion to dismiss arguing that the Defendants were immune from Dahlstrom’s claims based on the Tribe’s sovereign immunity. Dahlstrom replied that the sovereign immunity defense does not exist where a lawsuit is brought on behalf of the U.S. and, further, that the term “person” in the FCA includes tribal entities.

Decision. The Court granted the motion to dismiss with respect to Dahlstrom’s claims against the Tribe. However, it denied the motion with respect to the claims against CNM and the individual Defendants finding that while the Tribe was exempt from suit based on tribal sovereign immunity, the doctrine of sovereign immunity did not extend to CNM or to the individuals.

Analysis. The Court ruled that unless a tribe has given up its right not to be sued or Congress specifically has inserted language in a federal statute stating that a tribe can be subject to a lawsuit, a tribe like the Sauk-Suiattle cannot be sued under a particular statute because it is immune from suit as a sovereign nation. The judge in this case ruled that the FCA was not written to permit a lawsuit against an Indian tribe. In analyzing the Defendants’ sovereign immunity defense, the Court stated, “‘[a]s a matter of federal law, an Indian tribe is subject to suit only where Congress has authorized the suit or the tribe has waived its immunity.'”[5] Further, tribal [sovereign] immunity is “‘a matter of federal law and is not subject to diminution by the States.'”[6] Like a state, a Native American tribe is “‘a sovereign that does not fall within the definition of “person” under the False Claims Act.'”[7] Since the Sauk-Suiattle is a federally recognized Indian Tribe, the Court reasoned, the Sauk-Suiattle was immune from Dahlstrom’s FCA suit.

Next, the Court looked at whether CNM could be sued under the FCA. The Court explained that while the doctrine of sovereign immunity applies to a tribe, the doctrine applies to entities with a nexus to a tribe only if the entity can be shown by a preponderance of the evidence (i.e., more likely than not) to be an “arm of the tribe.” The Court summarized a five-factor test articulated by the Ninth Circuit[8] to determine whether a business functions as an “arm of the tribe” so that it is entitled to sovereign immunity. Ninth Circuit courts examined:

The method of creation of the economic entity;

The entity’s purpose;

The entity’s structure, ownership and management, including the amount of control the tribe has over the entities;

The tribe’s intent with respect to the sharing of its sovereign immunity; and

The financial relationship between the tribe and the entity.

After reviewing the parties’ pleadings and finding some inconsistencies in the descriptions of CNM’s relationship to the Tribe, the Court concluded that the Defendants had not met their burden of establishing that CNM is an arm of the Tribe. This means the plaintiff in the complaint, Raju Dahlstrom, could proceed against CNM even though the Sauk-Suiattle was immune from suit under the Court’s ruling.

Finally, the Court looked at whether the individual defendants who worked for the tribe and clinic could be sued under the FCA. The Court rejected their argument that they were covered by the Tribe’s sovereign immunity as tribal employees, agents or officials acting in their official tribal capacity. Under Stoner v. Santa Clara County Office of Education[9], state employees may be sued under the FCA even for “‘actions taken in the course of their official duties.'”[10] The Stoner Court cited Vt. Agency of Nat. Res. v. United States ex rel. Stevens[11] for the proposition that qui tam suits may be brought against individual state employees “‘because such [actions] seek damages from the individual defendants rather than the state treasury.”[12] The Court concluded, just as the reasoning of Stevens extended to provide tribes with sovereign immunity, “the reasoning in Stoner extend[ed] to permit suits against individual tribal employees for ‘actions taken in the course of official duties.'”[i][13] Accordingly, the Court held that the individual Defendants were not immune from suit under the doctrine of sovereign immunity.

Practical Takeaways and Recommendations

Tribal leadership and their counsel should take note of the Dahlstrom case for several reasons:

While sovereign immunity may be a well established defense to a FCA action brought against an Indian tribe as demonstrated in Dahlstrom, that immunity does not necessarily extend to tribal businesses, including health care-related businesses. Tribes located in the geographic area covered by the Ninth Circuit (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington) and desiring to extend their sovereign immunity to tribe-affiliated businesses, and entities should structure those businesses/entities to meet the “arm of the tribe” test articulated by the Ninth Circuit. Tribes elsewhere should seek guidance about the controlling case law in their jurisdictions, to determine how best to structure businesses or entities to protect their sovereign immunity defense rights.

Dahlstrom is yet another FCA case holding that a tribe’s sovereign immunity does not extend to individuals acting on behalf of a tribe as employees, agents or officials. In the non-FCA realm, the U.S. Supreme Court just ruled in Lewis v Clark[14] that a Mohegan Tribal Gaming Authority employed limousine driver was not entitled to tribal immunity related to a lawsuit over a motor vehicle accident, overturning a Connecticut Supreme Court decision upholding a sovereign immunity defense for the driver. In light of the new Dahlstrom and Lewis decisions, tribes and their counsel must consider options for protecting individuals who work for a tribe in good faith but who nonetheless are sued in their individual capacities for alleged wrong-doing. An individual working within the scope of their employment for a tribal business can be subject to potentially ruinous financial liability if sued under the FCA. Tribes may want to carefully review insurance options to cover individuals and tribal businesses. Tribes should also look at their own laws and contracts to understand indemnification and defense coverage issues in the event individuals and businesses are sued under the FCA.

Tribal councils and lawyers assisting tribes should pay close attention to the FCA. In fiscal year 2016 alone, the U.S. Department of Justice recovered over $4.7 billion from FCA cases.[15] Tribes and their leaders and providers are becoming more frequent targets of these actions. Often tribes are vulnerable to significant exposure under the FCA where some lack sufficient funding for robust protective compliance programs or the tribe’s long-time and community-oriented practices vary from federal legal requirements. Council members, health care committee and board members, providers and leaders in tribal health currently risk their own personal assets in these expensive cases. Tribes should consider utilizing some resources to expand compliance programs and to engage counsel to do a FCA risk assessment of their governmental billing practices.

In a case footnote, the Court noted that its dismissal of the case against the Sauk-Suiattle involved a FCA lawsuit where the U.S. government elected not to intervene in the case filed by the plaintiff Dahlstrom, leaving open the question whether the Court would have dismissed the case against the Sauk-Suiattle if the U.S. had intervened (i.e., joined) in the case.[16] This very issue was addressed by an Oregon federal district court FCA case decided on April 11, 2017[17], in which the Oregon court held that a state university was immune from suit under the FCA as an “arm of the state” under circumstances where the federal government intervened in the suit. The Oregon Court in Doughty v. Oregon Health & Sciences. Univ. concluded that the U.S. may not bring a FCA action against an arm of the state and that a sovereign immunity defense is not limited to FCA qui tam cases brought by private parties. This is a very positive development.

Tribes and their counsel should watch for developments in the Oregon case and in other FCA cases directed at Indian tribes.

If you have any questions or would like additional information about this topic, please contact:

[1] For a more complete background about the FCA, please request a copy of Healthcare and the False Claims Act, 2016, Honig, et al., Healthlaw Publishing LLC, 2017, at healthlawpublishing.com.

[2] Defendants Christin Marie Jody Morlock, N.D. and Robert Larry Morlock own Community Natural Medicine, PLLC. (“CNM”) Ronda Kay Metcalf is the Director of the Indian Health Services and of CNM. (Dahlstrom v. Sauk-Suiattle Indian Tribe of Washington, Order Denying Motion for TRO (Jan. 31, 2017)).

Written by: Allison Emhardt

On March 15, 2017, the U.S. District Court for the Western District of Pennsylvania provided the first federal court interpretation of the writing requirements affecting several regulatory exceptions in the federal physician self-referral statute (“Stark Law”) and its implementing regulations since the Centers for Medicare & Medicaid Services (“CMS”) provided sweeping revisions and clarifications to the Stark Law in 2016.1 This court opinion provides an in-depth interpretation of the recently implemented changes to the Stark Law writing requirements and how they relate to cases brought pursuant to the False Claims Act (“FCA”).

Background

Dating back to 1998, a private cardiology and internal medicine group practice (“Practice”) provided exclusive cardiology services to an Ohio-based medical center (“Medical Center”). In the early 2000s, the two parties joined to form a heart institute, which involved entering into six agreements for the Practice physicians to provide medical director services (“Medical Director Agreements”). These Medical Director Agreements automatically terminated on December 31, 2006. However, the two parties continued their relationship with no change and did not formally renew the agreements until November 29, 2007 via addendums that were backdated to January 1, 2007. This scenario played out again in 2008 and in 2009, with the addenda expiring and the parties later entering into backdated addenda until the agreements were eliminated altogether in March 31, 2010 due to a restructuring plan. Further, in 2008, one of the Practice’s physicians began performing administrative duties and receiving pay as a Chairman for the Medical Center’s Department of Cardiovascular Medicine and Surgery (“CV Chair Arrangement”). However, this position was never documented in a formal arrangement.

A cardiologist who was formerly employed by the Practice (“Relator”) filed a qui tam complaint against the Practice, the Medical Center and four individual physicians (collectively “defendants”). The Relator alleged that the defendants violated the FCA by submitting false claims for payment to the United States Government under the expired and missing agreements in violation of the Stark Law and the Anti-Kickback Statute. The defendants countered the allegations by arguing that the agreements were protected by three exceptions to the Stark Law: the personal services arrangements;2 the fair market value;3 and the isolated transaction4 exceptions. Although the government declined to intervene, the Relator continued to pursue the action.

The opinion from March 15, 2017 deals with cross-motions for summary judgment and specifically addresses whether the Stark Law writing requirements were satisfied for the above discussed agreements during the periods of time when the agreements lapsed. The court evaluates these issues under the clarified and modified view of the requirements promulgated by CMS.

CMS Revisions and Clarification

In the CY 2016 Medicare Physician Fee Schedule Final Rule (for a summary of the Final Rule, click here), CMS clarified that the Stark Law writing requirement does not require an arrangement to be documented in a single, formal contract and that a collection of documents could satisfy the writing requirement as long as they are contemporaneous and one of those documents bears the signatures of the parties to the arrangement. CMS provided a non-exhaustive list of the types of documents that could on their own or together constitute satisfactory contemporaneous documents:

As to the plaintiff’s first claim that the Medical Director Agreements when lapsed did not meet the “in writing” requirement of the various Stark exceptions, the court began by outlining the requirements for the fair market value and personal service arrangement exceptions, stating the writing requirement is not a “mere technicality,” but instead is essential to the transparency demanded by the Stark Law. The court then acknowledged that the writing requirement must be satisfied at all times by a “document or collection of documents that ‘permit a reasonable person to verify that the arrangement complied with an applicable exception at the time a referral is made.'”5 With these considerations in mind, the court determined the critical question of “whether sufficient documentation ‘evidencing the course of conduct of the parties’ exists for the periods of time in between the expiration of the agreements and the execution of the addenda.”6

In applying the standards to the facts at hand, the court determined the Medical Director Agreements and addenda, when coupled with a collection of documents detailing the ongoing relationship, could persuade a reasonable jury that the necessary evidence was presented to show a course of conduct consistent with the writing requirement of the exceptions. The collection of documents the court found evidencing the Practice and the Medical Center’s course of conduct included invoices and corresponding checks that coincided with the services, timeframe and compensation described in the Medical Director Agreements and subsequent addenda. Thus, with respect to the Medical Director Agreements, the Relator’s motion for summary judgment was denied.

The court ruled differently in regards to the CV Chair Arrangement that was not formalized in any signed document. Instead, the defendants attempted to meet the collection of documents requirement with “undated, unsigned memoranda,” a letter with a passing reference to the position, meeting minutes and bylaws, none of which described the positions in any specific details or contained the signatures of any involved parties. The court found that at minimum to satisfy the writing requirement, the document or collection of documents must describe identifiable services, a timeframe and a rate of compensation. The court also reiterated the signature requirement and made clear that regardless of the sufficiency of the “collection of documents,” at least one contemporaneous document must contain the signatures of the parties. The defendants attempted to bring the CV Chair Arrangement under the isolated transaction exception, but the court found that exception typically only applies to “uniquely singular transactions” and does not apply in this instance where the payments were not singular, but instead the first in a series of payments. Thus, because the CV Chair Arrangement failed to meet each of the Stark exceptions, the Relator’s motion for summary judgment was granted.

Defendants’ Motion – FCA: Scienter and Materiality

The defendants’ motion for summary judgment also argued that the Relator failed to establish the scienter and materiality requirements of the FCA. The court rejected both arguments and denied the defendants’ motion.

Scienter. Under the FCA’s scienter requirement, the Relator was required to show that the defendants: (i) had actual knowledge of the information; (ii) acted in deliberate ignorance of the truth or falsity of the information; or (iii) acted in reckless disregard of the truth or falsity of the information. In analyzing the scienter requirement, the court noted that there was ample evidence that the physicians of the Practice and the Medical Center believed all of the agreements to be in compliance with the Stark Law. However, the court opined that there was also ample evidence in the record to suggest that the Practice and the Medical Center may have knowingly violated the Stark Law in at least one manner by submitting claims for payment arising from medical directorships that were not covered by a written agreement. The court noted that a Senior VP and Medical Director of the Medical Center issued a memorandum expressly acknowledging that the parties continued to operate under expired contracts. There was also additional evidence, including solicited legal advice, engagement of a Stark consultant and retroactive addenda to cover the lapse of time that showed the Practice and the Medical Center were aware the documents relating to the agreements were not at all times in compliance with Stark and yet they continued to act upon those agreements. This evidence, the court determined, could lead a reasonable jury to conclude that the Practice and the Medical Center continued to submit claims for payment despite knowing that the underlying arrangements may not have been properly documented for purposes of Stark compliance.

Materiality. In order to be actionable, the FCA also requires a misrepresentation or false claim to be “material to the Government’s payment decision,” and the defendants argued that even if they were found to have violated the Stark Law, those violations would not hold up under the materiality requirement of the FCA. Relying upon the 2016 standard outlined in United States ex rel. Escobar v. Universal Health Services, Inc., the court considered the following factors: whether compliance with a statute is a condition of payment; whether the violation goes to “the essence of the bargain” or is “minor or insubstantial”; and whether the government consistently pays or refuses to pay claims when it has knowledge of similar violations.

In applying these factors, the court determined that the alleged violations at issue were material because the Stark Law “expressly prohibits Medicare from paying claims that do not satisfy each of its requirements, including every element of any applicable exception.” Because compliance with each element is required, the writing requirement is not “minor or insubstantial.” Rather, it is crucial to the transparency demanded by the Stark Law and goes to the very “essence of the bargain.” The court also acknowledged that there was a lack of evidence suggesting the government refuses to pay or pays when they have actual knowledge of these violations but recognizes that providers who do violate these provisions are required to pay penalties when those violations are brought to light. Balancing all of these factors, the court determined summary judgment was not appropriate because the writing requirements contained in several Stark exceptions “are important, mandatory, and material to the government’s payment decisions.”

Practical Takeaways

Even in light of the clarified Stark Law writing requirements, providers must exercise caution in documenting physician arrangements. As noted by the court in this case, any “collection of documents” relied upon must contain at least one contemporaneous writing, signed by the parties. The collection of documents must also describe: 1) identifiable services; 2) a timeframe; and 3) a rate of compensation. Therefore, mere checks alone will not be sufficient to satisfy the writing requirement. Providers should attempt to document all physician arrangements and obtain signatures wherever possible. This case also illustrates that a failure to satisfy the writing requirements may subject a provider to increased liability under the FCA. Further, the holding in this case demonstrates that awareness that some claims may not be covered by a written agreement may be enough to satisfy the scienter requirement under the FCA.

If you have any questions about this case, or related issues, please contact:

Written by: Jonathon Rabin

The Attorney General of the United States has an unreviewable veto power over qui tam settlements, according to the Fourth Circuit’s recent published decision in United States ex rel. Michaels v. Agape Senior Community.[1] In the same decision, the court declined to decide an issue raised by the relators over the trial court’s refusal to allow statistical sampling to prove damages, a method of proof that would have cost the relators an estimated $36 million, far more than the value of the case.

In Michaels,the relator brought an action alleging that 24 affiliated elder care facilities defrauded Medicare and other federal health care programs by charging for unnecessary services and services for which the patients were not eligible.[2] The federal government, after receiving an extension, declined to intervene.

According to the relators, it would have cost $36 million to present their proof of damages. They said it would take their experts four to nine hours per patient to review the charts for about 50,000 alleged claims submitted to federal health care programs. The trial court refused to allow statistical sampling under those circumstances because the evidence was available for expert review. It had not been “destroyed or dissipated.”[3]

After that decision was made, the relators and the defendants reached a confidential settlement, but the Department of Justice, after being presented with notice, objected because the amount of the proposed settlement was appreciably less than the $25 million that the government estimated in damages based on its own statistical sampling.[4] When the relators moved to enforce the settlement, the trial court sustained the government’s objection and concluded that the Attorney General’s office had unreviewable veto power over qui tam settlements even, as in this case, where the government had not sought to intervene in the matter.[5] The trial court noted that if it could review that decision, it would have concluded that the government’s position was not reasonable because it would have cost the relators between $16.2 million and $36.5 million for trial preparation alone.[6]

Instead of proceeding first to trial, the court certified both issues for appeal – the “unreviewable veto power” and the use of statistical sampling. Certification is a little-used procedural method of having significant pretrial issues decided by the appellate court before trial.

The Fourth Circuit first addressed the unreviewable veto power issue. It considered decisions from the Fifth, Sixth and Ninth Circuits.The Fifth and Sixth Circuits had concluded that the Attorney General has absolute veto power over voluntary qui tam settlements.[7] The Ninth Circuit, on the other hand, had held years earlier that the government carried unreviewable veto authority only during the limited initial 60-day (or extended) period during which the government was allowed by statute to intervene without court approval.[8] After that period, according to the Ninth Circuit, the government needed “good cause” in order for its objections to be sustained by a court.[9]

In Michaels, the Fourth Circuit agreed with the Fifth and Sixth Circuit because, it said, the “plain language” of 31 U.S.C. 3730(b)(1), that a “qui tam action may be dismissed only if the court and the Attorney General give written consent to the dismissal and the reasons for consenting,” was unambiguous.[10] It rejected the Ninth Circuit’s position based on language in 31 U.S.C. 3730(d)(2) that states that, where the government declines to intervene, “the person bringing the action or settling the claim shall receive an amount which the court decides is reasonable for collecting the civil penalty and damages.”

The court then decided not to decide the statistical sampling issue presented by the relators.[11] The Fourth Circuit concluded that the relators had not presented a pure question of law that was appropriate for a pretrial review by the appellate courts.[12] This was because they presented a question about the trial court’s exercise of discretion in refusing to allow such sampling.[13]

The decision in Michaels places the federal government in a strategically strong position in qui tam actions. By vetoing settlements without having intervened in the dispute at all, the government can avoid significant expenditure of money and resources by sitting back and watching the relators litigate with defendants and then saying “no” without that decision being subject to judicial review – regardless of whether the government’s objection is reasonable. That impacts both relators and defendants who may spend months (or years) in litigation with nothing to show for it prior to trial. The trial court’s decision in Michaels with respect to statistical sampling also adds to the bar for relators because, as in that case, it could cost millions to prosecute the issues of damages alone.

If you have any questions, please contact Jon Rabin at jrabin@hallrender.com or (248) 457-7835 or your regular Hall Render attorney.

Written by: Drew B. Howk

In light of the Supreme Court’s recent decision in Universal Health Services v. Escobar, the Seventh Circuit revisited its prior ruling in United States ex rel. Nelson v. Sanford-Brown, Ltd, a case alleging that a college receiving federal subsidies violated the False Claims Act (“FCA”) by maintaining discriminatory recruiting and retention practices. The Seventh Circuit addressed a narrow issue on review: whether the Relator’s implied certification claim – that the court previously ruled could not survive summary judgment – could be resurrected in light of Universal Health. The court held that the claims could not survive summary judgment and thereby reinforced its long-standing skepticism of FCA liability under an implied certification theory.

Background

Sanford-Brown College (the “College”) received federal subsidies under the Higher Education Act by way of entering into a Program Participation Agreement (“PPA”) with the U.S. Government. The PPA included familiar boilerplate language used across federal agencies that required the College to affirm that as a condition for the subsidies, it would comply with all statutory, regulatory and contractual requirements relating to Title IV.

The Relator alleged that the College’s recruiting and retention practices violated the affirmation it would abide by the requirements under Title IV. Linking these alleged violations to the broad affirmation to abide by the law, the Relator pursued an implied certification theory under the FCA.

In its original decision, the Seventh Circuit affirmed the trial court’s grant of summary judgment in favor of the College. Relying on the distinction between conditions of payment and conditions of participation, the court forcefully rejected the Relator’s argument, characterizing implied certification claims as an imprecise mechanism for “enforcing violations of conditions of participation.” The court reasoned that these claims “lack a discerning limiting principal” and would hold the College implicitly liable for any violation of “thousands of pages of federal statutes and regulations incorporated by reference into the PPA.”

After the Supreme Court’s ruling in Universal Health – discussed in more detail here – the court reviewed its decision in Nelson on remand.

The Seventh Circuit revisited the narrow portion of its previous decision and applied the two-part test set forth in Universal Health to evaluate the Relator’s implied certification claims.

Does the claim at issue request payment and make specific representations regarding the goods or services being provided?

Was the defendant’s failure to disclose its noncompliance material to the specific statutory, regulatory or contractual requirement allegedly violated?

In Nelson, the Seventh Circuit held that neither requirement was met.

First, the Seventh Circuit held that the Relator put forth no evidence that the College had made any specific representations to the Government regarding its claims for payment, “much less false or misleading representations.” The Relator’s mere speculation that such representations occurred was insufficient.

Second, relying upon the ”’rigorous’ and ‘demanding'” materiality standard under the FCA, the Seventh Circuit held the alleged violations were immaterial to the subsidies the College received. Under the FCA’s materiality requirement, evidence must demonstrate that the government was likely to, or actually did, reject claims for payment based on similar violations. It is insufficient to demonstrate only that “the government would have the option to decline” payment had it known of the violations.

Moreover, the court reiterated its previous position that the government’s actual knowledge of violations, but continued payment for the good or service, continues to be uniquely strong evidence undercutting the materiality requirement. Here, the government had already examined the College’s alleged violations, continued making subsidy payments under the PPA and determined not to impose administrative penalties or terminate the agreement.

Having failed to meet either requirement of the two-part test under Universal Health, the Seventh Circuit reaffirmed the district court’s grant of summary judgment in the College’s favor.

Practical Takeaway

How the Seventh Circuit readdressed FCA implied certification claims is important for health care providers and government contractors. It rebuts expectations that Universal Health would invite a deluge of implied certification claims that could dramatically remake the FCA landscape.

Taken broadly, the court’s decision makes it clear that it remains largely skeptical of implied certification claims. Despite being just three and a half pages long, the decision is a ‘greatest hits’ of Seventh Circuits previous opinions that reiterate its strong apprehension of implied certification FCA claims.

More narrowly, the Seventh Circuit’s application of the Universal Health decision sets a high bar to clear for Relators and the government pursuing FCA cases under an implied certification claims.

In short, the more things change, the more things stay the same – at least in the Seventh Circuit.

Written by: David Honig

In November 2015, the Bipartisan Budget Act of 2015 went into effect. One aspect of that act was the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. The new law required that the Program Fraud Civil Remedies Act and the False Claims Act (“FCA”) penalties be “corrected” to adjust for inflation since their last adjustment and then that the penalties be adjusted for inflation each following year.

In May, the Railroad Retirement Board was the first agency to issue its inflation “corrections,” shocking the FCA world. This week, the Department of Justice (“DOJ”) followed suit, expanding the spike to the entire FCA world.

In 1986, the FCA was completely rewritten and included a minimum penalty of $5,000 per claim and a maximum penalty of $10,000 per claim.

In 1996, under the Debt Collection Improvement Act of 1996 (“1996 Act”), the minimum and maximum penalties were increased to $5,500 and $11,000, respectively. Practitioners expected the correction to run from that date, leading to an increase of approximately 140% with a maximum penalty of about $15,000.

Instead, the government disregarded that correction because it was subject to the 10% cap set forth in the 1996 Act. The government went all the way back to 1986, leading to a massive 216% penalty increase.

The new DOJ minimum penalty per claim under the FCA is $10,781 and the maximum is $21,563. These will have an immediate effect on health care providers submitting Medicare and Medicaid claims.

To government contractors, this is a foreboding change. The FCA was always onerous, to the point that the Eighth Amendment Excessive Fines Clause was often considered, though no case ever turned on that issue. This massive increase may well put that defense back in play, particularly for claims that are microscopic in comparison to the penalties, e.g., a $5.00 laboratory service. While penalties are often not paid as part of negotiated settlements, they are mandated for any case decided by a court. It is that threat that often makes settlement discussions feel like coercion or even extortion to contractors.

For contractors, and particularly health care providers, this suggests new measures should be considered to insulate from these heightened penalties. One such suggestion is the batching of individual services to include as many as possible on a single “claim” to the government. The FCA applies to “claims for payment,” not individually itemized services found within each claim. There is no case law yet to guide providers on whether services for multiple recipients found on a single claim for payment would be one or many claims. However, that is the best prophylactic action available and provides the sort of argument courts will welcome to avoid having to resolve issues on Eighth Amendment constitutional grounds.

The FCA’s treble damages penalty was not changed as part of this adjustment.

The maximum civil monetary penalty was increased to $10,781.

All of these changes are effective for penalties assessed after August 1, 2016. This includes any failure to identify a prior overpayment after more than 60 days under the FCA’s 60-Day Overpayment Rule. Notably, the DOJ stated that penalties associated with violations that occurred prior to November 2, 2015, the date the Bipartisan Budget Act went into effect, will still be subject to the old penalties.

Health Care Takeaway

The FCA’s already oppressive penalties have become draconian. Providers best avoid these new penalties with strong compliance programs and by working closely with their health care counsel to evaluate their programs, particularly in the billing and coding departments, as this terrifying specter looms over the entire industry. Providers can protect themselves somewhat from these changes by adjusting their billing practices to include as many individual services on as few claims for payment as possible.

In Escobar, the FCA case was based upon the theory that counseling was provided by practitioners who were not properly licensed according to state regulations. However, the counseling was actually provided, and the licensing regulations did not specifically state they were conditions of payment. This is an “implied certification” theory as the actual claims were not false but the submission of the claims impliedly certified compliance with statutes and regulations.

The Defendant argued that the “implied certification” theory could not apply unless the statute or regulation violated explicitly stated compliance was a condition of payment.

The United States government, on the other hand, argued that implied certification was sufficient to make the falsity material. Additionally, the government argued, any claim submitted in violation of a statute or regulation that was an express condition of payment, no matter how trivial, would be a per se violation of the FCA.

The Court rejected both arguments.

It started with the language of the FCA, which imposes liability for a “material” false statement. It first ruled that implied false certification could form the basis for an FCA case if (a) the claim both requests payment and makes specific representations about the goods or services provided; and (b) failure to disclose statutory, regulatory or contractual violations are “actionable half-truths,” knowing failures to fully disclose relevant information.

The Court then addressed the “condition of payment” question.

The Court first rejected the argument that an implied certification case requires an explicit condition of payment. Rather, the violation must be “material,” as determined from a fact-based analysis. If, for example, a provider knows or should know the violation would be material to the government’s payment decision, it is irrelevant whether the statute, regulation or contract explicitly identifies it as a condition of payment. If the provider knows that the government refused to pay similar claims for such violations, submission of such claims could create FCA liability.

The Court then rejected the government’s argument that any explicitly identified condition of payment could form the basis for an FCA lawsuit, no matter how trivial. The language of the statute, regulation or contract is not relevant to the determination, the Court ruled. The only relevant issue to materiality is the government’s actual payment decision. If, for example, the government routinely pays claims submitted in violation of a regulation that is explicitly identified as a condition of payment, that violation would not be material to the payment decision and could not be the basis for an FCA claim.

The Court, by rejecting both arguments, refused to consider the existence or non-existence of condition of payment language as the touchstone for an FCA implied certification case. Instead, it ruled that materiality was a factual analysis determined by the provider’s knowledge and the government’s previous behavior in the face of such violations.

Health Care Takeaway

The Escobar decision is a significant event in False Claims Act law. No longer can providers rely upon the distinction between “conditions of payment” and “conditions of participation” in assessing potential risks. Instead, they must look to the possible violation itself, the likelihood that it will be relevant to the government’s payment decisions and the government’s previous behavior in response to such violations.

If you have any questions, please contact David B. Honig at dhonig@hallrender.com or (317) 977-1447 or your regular Hall Render attorney.